Decoding the W-9 Form: The W-9 is an IRS-issued form for employers and other entities to verify the name, address, and taxpayer identification number of a person receiving income.
Typically, the information from a W-9 form is used to generate a 1099 tax form, which is required for submitting income taxes.
Under severe privacy regulations, the information collected by an entity on a W-9 form cannot be disclosed for any other purpose.
Independent contractors who work for non-employer companies are frequently required to submit a W-9.
If you fail to provide a W-9 when requested, your client must withhold 24% of your earnings as taxes.
What Is the W-9 Form?
A W-9 form is a tax form used by the Internal Revenue Service (IRS) to certify an individual’s name, address, and taxpayer identification number (TIN) for employment or other income-generating purposes. The confirmation can be requested on behalf of either a U.S. citizen or a resident alien.
Request for Taxpayer Identification Number and Certification Form, also known as a W-9 form.
Comprehending Form W-9
A W-9 form is a formal written request for information used solely to affirm a taxpayer identification number (TIN). An employer or other entity required to file an informational document with the IRS, such as Form 1099, must obtain your correct TIN in order to report any earnings or losses that could effect your federal tax return or taxable income. For the vast majority of people, the TIN is their Social Security Number (SSN).
The W-9 differs from a W-4 Form, which is more commonly provided by employees to direct employers, in that it does not automatically arrange for any taxes to be withheld.
Unless the taxpayer is subject to backup withholding, the holder of the TIN listed on the W-9 is responsible for paying any taxes owed on gains associated with the document. If backup withholding is required, this must be indicated on Form W-9 to notify the entity receiving the information of the need to withhold the appropriate amount.
Employing Form W-9
Typically, the information obtained on a W-9 form is used to generate a variant of Form 1099. A 1099 form contains information about any income the TIN holder may have received that would not typically be reported on a W-2.
However, only employees of a company receive a W-2, not independent contractors or unrelated vendors. This includes, but is not limited to, contract income, certain real estate transactions, dividends paid against an investment, and various other financial transactions.
Form 1099 is only required once the minimum income threshold of $600 is met, which is the case for the majority of miscellaneous income. Amounts less than this threshold must be reported as income by the TIN holder, but a 1099 form is not required.
Even though employees are required to provide certain personal information to their employers, the law protects their privacy. Employers who unlawfully disclose an employee’s personal information may face civil and criminal prosecution.
How to Complete Form W-9
Form W-9 is one of the simplest IRS tax forms to complete, but if tax forms make you anxious, have no fear. We will demonstrate the correct method to complete it.
On the IRS website, you’ll find all pages of Form W-9. In addition, the form may contain a specific set of IRS-issued instructions.
First Step: W-9, Line 1
Provide your name as it appears on your tax return.
Second step: Line 2 of Form W-9
If your business name or “disregarded entity” name differs from the name you provided in step 1, input it here. You may be a sole proprietor, but for marketing purposes you do not use your personal name as your business name; rather, you are “doing business as” a different name. This is where you would input that name.
One entity type that is frequently overlooked is the single-member limited liability company. S corporations and sole proprietorships are never considered disregarded entities.
Third step : Line 3 of Form W-9
Select the type of business entity you are for federal tax purposes: sole proprietorship, partnership, C corporation, S corporation, trust/estate, limited liability company, or “other” Only one classification should be selected by checking the corresponding item.
As part of the Form W-9 instructions, the IRS has provided a summary table for guidance if you are unsure of the type of business entity to select.
Fourth Step: Form W-9, Line 4
There are exemptions. Most likely, you will leave these fields blank. Here are a few notable exceptions:
In most cases, corporations that are exempt from backup withholding are required to input a code in the “Exempt payee code” box. The Form W-9 instructions include a list of exempt payees and their respective codes, as well as the categories of payments for which these codes should be used. For example, corporations completing a W-9 for interest or dividend payments would input code “5.”
Payees who are exempt from reporting requirements under the Foreign Account Tax Compliance Act (FATCA) may be required to input a code in the “Exemption from FATCA reporting code” field. These options will not apply to the average independent contractor or freelancer.
Fifth step: W-9, Lines 5-6
Your street address, city, state, and postal code are required. Use the address you intend to list on your tax return. For instance, if you are a sole proprietor who rents office space and you submit your tax return using your home address, you must include your home address on form W-9 so the IRS can match your 1099s with your Form 1040.
In addition, the W-9 may be the primary means by which a company obtains your personal information. As this information may be entered into their accounting system when you are set up as a supplier, this address may be used to send you your 1099 or other essential tax documents.
Sixth Step: W-9, Line 7
In this optional stage, you can provide the name and address of the requester. You should tick this box to maintain track of who you have provided your tax identification number to.
Additionally, you have the option of listing relevant account numbers at the conclusion of this section. This section may be used to uniquely identify an individual based on a number in the client’s system. For instance, you may be asked to complete a Form W-9. As supplier #45 in their records, they may request that you include your supplier number on this line.
7th Step: W-9 Part I
In Part I, you must provide your business’s tax identification number, which is either your Social Security Number if you’re a sole proprietor or your employer identification number (EIN) if you’re a corporation or partnership.
However, the IRS prefers that sole proprietors use their SSNs on Form W-9. Again, doing so will facilitate the matching of any 1099s you receive with your tax return, which will be filed using your SSN.
What if your business is brand-new and lacks an EIN? You may continue to complete a W-9 form. According to the IRS, you must register for your number and write “applied for” in the TIN field. You should obtain this number as soon as feasible, as you will be subject to backup withholding until you do. The IRS website allows you to apply for an EIN. Refer to the instructions for Step 8, Part II, for additional information on fallback withholding.
Eighth step: W-9, Part II
Before you can sign Form W-9, you must attest to the veracity of all of your information in Part II. Intentionally lying on a tax form could result in a fine or prison time; the IRS does not play games. Before signing form W-9, you must attest that the following statements are true, under penalty of perjury:
1. The number listed on this form is my valid taxpayer identification number (or I am awaiting issuance of a number).
Taxpayers must utilise valid tax IDs. Using a “borrowed,” stolen, or fabricated tax ID number is equivalent to perjury and carries severe consequences.
2. I am not subject to backup withholding because
(a) I am exempt from backup withholding, (b) the Internal Revenue Service (IRS) has not notified me that I am subject to backup withholding due to a failure to report all interest and dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding.
The vast majority of taxpayers are exempt from fallback withholding. You are likely exempt if you have no notion what the IRS is talking about here. If you are not exempt, the IRS will notify you, and the company paying you must be informed because it is required to withhold 24% (as of 2020) of your pay as income tax and submit it to the IRS. Moreover, you are now aware of a further reason to avoid filing a false tax return: you may have to disclose it to a future client, which could make them reconsider hiring you. If you were previously subject to backup withholding but are no longer, item (c) states that no one needs to know.
3. I am a citizen or national of the United States.
If you are a resident alien, you are safe. Additionally, the IRS considers the following to be “U.S. persons”: a partnership, corporation, company, or association formed or organised in the United States or under U.S. law; a domestic estate; and a domestic trust. Special rules apply if your business is a partnership with a foreign partner; you can find them in the Form W-9 instructions. If you are not a U.S. citizen, you may instead need to complete Form W-8 or Form 8233.
4. The FATCA code(s) entered on this form indicating that I am exempt from FATCA reporting (if any) are accurate.
This issue, which relates to the Foreign Account Tax Compliance Act, will likely not require your attention.
Who Must Complete Form W-9?
If a second party is going to provide certain types of payments in the future, the first party must submit a Form W-9 and provide it to the second party. Form W-9 must be completed by independent contractors who perform services for a third party for whom they are not employed. This includes independent contractors and gig labourers in non-employment structures.
In certain situations, individuals must also submit a Form W-9. As part of the process of opening a new account, a bank or lending institution may request a W-9, as interest and dividend payments are reported on Form 1099-INT. Contest winners may also be required to complete a W-9, as the value of the prize may be taxable income and require IRS reporting.
Form 1099 is also used to report mortgage interest payments, student loan payments, the proceeds from real estate transactions, and the cancellation of certain categories of debt. To ensure that they have the appropriate information on file, the opposing party may request Form W-9.
Form W-9 must be completed whether you are subject to withholding or not. This form is your means of communicating your exemption to the paying party if you are exempt.
Accepting Form W-9
If the IRS has informed you that you are subject to backup withholding because you failed to report all interest and dividends on your tax return, you must cross out item 2 on Form W-9.
If you are completing Form W-9 in connection with a real estate transaction, you may strike out item 2. In this instance, Item 2 does not apply, so it is irrelevant whether you are subject to backup withholding.
If you read the W-9 instructions attentively, it appears that the vast majority of taxpayers are not required to sign this form. Generally, you are only required to approve it if the IRS has informed you that an incorrect TIN was previously provided. Regardless of technicalities, the individual who requested that you complete Form W-9 will likely consider it incomplete or invalid if you have not signed it.
Submitting Form W-9
Return your completed Form W-9 to the organisation that requested it. Ideally, you would deliver it in person to reduce your risk of identity theft, but this is not always possible. Mail is regarded as being relatively secure.
If you must submit the form via email, you should encrypt both the document and your email message and verify the recipient’s email address three times before sending the message. There are free online services that can assist you with this, but you should investigate their reputations before entrusting them with your documents. Typically, the business that must submit a W-9 to the IRS will provide you with a form to complete.
Non-Submission of Form W-9
If someone requests a completed Form W-9, it is typically for a worthy reason. Be wary of requests where it is unclear why your information is required or who is requesting it. It is anticipated that requests will be fulfilled as part of routine business operations.
There are consequences if Form W-9 is not submitted. Initially, the payer must begin withholding taxes from future payments. The present rate of withholding in 2022 is 24%.
In addition, the following sanctions apply for noncompliance:
Each failure to provide a correct TIN to a requestor is subject to a $50 penalty, unless you can demonstrate that the error did not result from willful neglect.
If you make a false statement with no reasonable basis that results in no fallback withholding, you will be subject to a $500 penalty.
Other penalties and/or imprisonment may be imposed for intentionally forging certifications or declarations.
In violation of federal law, disclosure or misuse of another party’s W-9 information may result in civil and/or criminal penalties.
Form W-9 versus W-4
Forms W-9 and W-4 are frequently utilised for tax purposes. Although they sound similar, their purposes, recipients, and uses are very distinct.
Form W-9 is used to request tax-related information from a taxpayer (typically an independent contractor or freelancer). The W-4 form is used by employees to provide information to their employers regarding income tax withholding.
The taxpayer sends the W-9 form to the entity compensating the taxpayer (the person or company providing the services). When reporting the payments made to the taxpayer at the end of the year, the organisation uses the information from the W-9 form to generate Form 1099-MISC or other applicable tax forms.
This differs significantly from Form W-4. The employee provides the W-4 to their employer. The W-4 is utilised by the employer to determine the amount of federal income tax withheld from an employee’s paycheck and reported to the IRS. Instead of requiring this from an outside source, a company obtains a W-4 from its own internal team.
Lastly, many of the same questions are asked on both forms. Each requires a TIN, a name, and tax-related information. However, the recipient’s characteristics are quite distinct. A W-4 will request information regarding the filing status of the taxpayer (e.g., is the taxpayer married?). In contrast, a W-9 requests legal company information.
What Does Form W-9 Serve?
Form W-9 is used to transmit tax information between parties. It is a method of formally collecting personal information, having a standard method of transmitting information, and requiring the furnisher to certify that the information is accurate. Then, Form W-9 is used to issue specific tax statements to non-employees who earned specific categories of payments throughout the year.
Who Must Complete a W-9?
In general, anyone who will receive compensation as a non-employee must complete Form W-9. There are numerous circumstances in which Form W-9 may be required. For instance, a taxpayer who is scheduled to collect interest, receive proceeds from a real estate transaction, pay home mortgage interest, pay student loan interest, or have a debt cancelled must also receive certain categories of Form 1099. An opposing party may request your tax information via Form W-9 in order to complete the tax form accurately.
Individuals who are self-employed may use a W-9.
Yes, a W-9 is most commonly used by self-employed individuals. Form W-9 must be provided to those from whom you have earned more than $600 as an independent contractor, freelancer, or self-employed individual.
What Happens If I Fail to Submit Form W-9?
If you do not submit a Form W-9 or if the information provided is inaccurate, a 24% withholding tax will be deducted from future payments you receive from your client. In addition, there are penalties and fees for providing incorrect information or misusing TINs on purpose.
